If you’re interested in starting a business, one of the first challenges is capital. We all need money to live on, and starting a business when you have a job can eat up all of your free time and money. Even if you can get things started, there will come a point when you will have to make the leap and work for yourself full time. Working with an invoice factoring firm can get you the capital you need to move in that direction.
Invoice factoring is used by a business that has product or services ready to deliver but is hampered by waiting for payment. You can do some temporary “tightrope” financial finagling, such as credit cards, but you may wind up paying high rates of interest and face limited growth opportunities due to low cash flow.
Per the experts at Lantern Credit, the questions on what is invoice factoring become clear if you think of it as a prepayment to you.
If you as a small business owner have a product or service to sell but no cash to get or keep your business rolling, you work with a factoring firm. Your responsibilities include
- selling and delivering the product
- submitting your invoices to a factoring firm
Once the factoring firm approves, they send you the payment for the invoices you submitted. You now have money to get your business up and running while your clients pay the factoring firm via the invoices.
What is it used for?
Invoice factoring is extremely useful when you’re ready to expand your offerings and build a steady supply of stock or time. Instead of scrambling to pay for the raw goods that go into your business, you can work with an invoice factoring firm, get the proceeds from all of your invoices at once, and make a bigger purchase. It’s similar to a bridge loan, but the “collateral” you’re offering is the work you’ve already done or the product you’ve already shipped.
How much does it cost?
Every financing company that offers factoring will have fees that you must cover before you get either deposit. The structure of the factoring payout includes two deposits into your account.
Your first payout will come quickly and be based on the expected payments from the invoices. This payout will only be a portion of your invoiced total, which will be agreed upon before you sign up with the factoring company. They will collect the payments from the invoices in this bundle, deduce fees and any discounts, and pay you the remainder.
